Documentos - Omer Gokcekus

Business Cycle and Corruption

Omer Gokcekus, Yui Suzuki John C. Whitehead School of Diplomacy and International Relations Seton Hall University USA

EOC 2010, October 9-14, 2010, Passau, Germany

Introduction - Permanent income and corruption

z the higher the income level, the lower the corruption (e.g., La Porta et al, 1999; Mauro, 1995; Shleifer and Vishny, 1993; Treisman, 2000) - Transitory income and corruption z ???

Gokcekus & Suzuki, EOC 2010

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Transitory income and corruption Galbraith ( The Great Crash 1929, p.133) "At any given time there exists an inventory of undiscovered embezzlement in — or more precisely not in — the country's businesses and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times, people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks."

Gokcekus & Suzuki, EOC 2010

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Model (a la Mélitz and Zumer (2002) CORRUPTi,t

β0

β1 INCOMEi

β2 INCOMEi,t

INCOMEi

εi,t ,

(1)

where CORRUPTi,t = (CORRUPTi/CORRUPTAVE)t,; INCOMEi,t = (GDPi/GDPAVE)t, INCOMEi , (average income) reflects the level of permanent income at country i relative to other countries in the sample, INCOMEi,t

INCOMEi , (deviation from the average income) reflects transitory income Gokcekus & Suzuki, EOC 2010

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Model (a’ la Mélitz and Zumer (2002) …

Equation 1 can be decomposed into the following two parts: CORRUPTi

β0

β1 INCOMEi

CORRUPTi,t

CORRUPTi

ηi

(2)

β2 INCOMEi,t

INCOMEi

μi,t ,

(3)

Also, Equation (3) could be re-formulated as: CORRUPTi,t

CORRUPTi

∑Lj 0 β2,t

j

INCOMEi,t

Gokcekus & Suzuki, EOC 2010

j

INCOMEi

i,t ,

(4)

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Estimation Results Equation (2) (2) (3)

Column (1) Independent Variable (Coefficient)

OLS

IV (2SLS)

Constant β0

0.56*** (0.06) 0.44*** (0.05)

0.45*** (0.09) 0.55*** (0.08)

Permanent income β1 Transitory income (β2 )

Equation (3) (4) (5) OLS

GMM-IV

GMM-IV

-0.15*** (0.06)

-0.10** (0.05)

-0.09 -0.05

Transitory income (β2,t ) Transitory income (β2,t Number of observations Adjusted R2 Degrees of freedom

Equation (4) (6)

(0.10) 1

-0.04

)

(0.11) 39

39

507

0.66

0.62

0.01

37

37

506

Gokcekus & Suzuki, EOC 2010

507

507

21

43

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Concluding Remarks Main finding: Corruption expands in good times and shrinks in bad times.

Policy implication: In good times regulators need to pro-actively take precautionary measures and apply meticulous audits.

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